GoAir to buy 72 Airbus planes as passenger demand surges

GoAir to buy 72 Airbus planes as passenger demand surges

Mumbai: GoAir, the smallest of India’s low-fare carriers, on Thursday announced an order for 72 Airbus SASA320neos, marking the airline’s turnaround and bidding to join larger rivals such as IndiGo and SpiceJet as it seeks to expand on the back of the country’s burgeoning travel business.

The latest order is worth about 32,400 crore ($7.2 billion) at list prices. GoAir, which was launched in 2005 and made losses till 2009, currently has 10 A320 planes. Together with an order of 20 A320s placed in 2006, GoAir’s total order with Airbus is now 92 aircraft worth 43,200 crore at list prices.

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“Let me tell you, these 72 planes are confirmed orders, not options," said Jehangir (Jeh) Wadia, younger son of Wadia Group chairman Nusli Wadia, making one of his first press appearances in three years in Mumbai to announce the deal.

The GoAir order comes after rival IndiGo, run by InterGlobe Aviation Ltd, placed an order for 180 Airbus SAS A320s, valued at close to $15 billion. The carrier, India’s biggest low-fare carrier and number three overall, will start flying to international destinations on 1 September.

Also Read:GoAir may place order at Paris Air Show

SpiceJet Ltd, which has already starting flying overseas, has ordered 15 Bombardier Q400 planes with an option for another 15 at a total cost of $900 million. These smaller planes will connect tier II and III cities.

Wadia doesn’t have any plans to fly abroad. “I am more looking at opportunities in India. At present, I do not have aspirations to fly overseas. On the contrary, we are working out a new network expansion strategy to tap tier II and tier III cities," he said. GoAir will start taking deliveries of 15 planes every year starting 2015.

Strong passenger demand, which rose by over 18% in the year to March from the year earlier, was the key driver of GoAir’s performance. Consulting firm Centre for Asia Pacific Aviation, or Capa, said demand is expected to outstrip capacity this year, with projected domestic traffic growth of 17-18%, possibly as high as 20%.

The carrier would have made a net profit of 50-60 crore in the last fiscal, estimated Kapil Kaul, chief executive of Capa’s India unit.

“GoAir has made profit at net levels for the last two fiscals. It (may) go for an initial public offer (IPO) this financial year," Kaul said.

Wadia said the airline posted a 61% increase in revenue in the last financial year.

“Profit after tax was up by 7%, operating margin up by 15.7% and operating profit up by 13.7%," Wadia said, without giving actual figures. GoAir is a privately held company, fully funded by the Wadia Group.

GoAir has started returning money to the Wadia Group, said a person close to the development.

“The group used to pump in money. Now the airline has started repaying it to the group. The airline has also started talking to investment bankers for a possible infusion of funds through either a private equity placement or IPO," he said, requesting anonymity.

Wadia said the airline was generating money and that the group was capable of funding the 72-plane deal through a mix of equity and debt. “We do not need outside help to fund this deal. Also, we do not have immediate plans to go public," he said.

SpiceJet’s net profit rose 64.62% to 101.16 crore in the year ended March 2011. IndiGo is not listed.

GoAir’s finances mark a reversal of fortune from two years ago, when the industry was shaken by the global economic crisis. In each of the 2008 and 2009 financial years, the Indian aviation industry posted a loss of $2 billion because of the slump and high fuel prices.

Nusli Wadia had told the ET Now news channel in 2009 that aviation was plagued by excess market capacity.

“That was two years ago. Now the outlook has changed," said Jeh Wadia. “Now, this is a positive industry to be in and growth is going to be very sustainable. It is a sunrise industry."

GoAir began its turnaround with a change in management, when Kaushik Khona was made chief executive officer. Khona was vice-president (finance) of the corporate group at Bombay Dyeing, the flagship company of the Wadia Group.

“Jeh Wadia stepped back and got involved only for strategic decisions,"Capa’s Kaul said. “Kaushik Khona focused on the fast turnaround of flights, higher utilization of aircraft and maintained reliability in terms of on-time performance and operational efficiency."

The effort came just as passenger demand surged.

Khona was not available for comments, despite repeated efforts.

“It all starts with management. Khona did a fantastic job. He was our group resource and he will continue to advise us,"Jeh Wadia said. “Now, we are looking at a new growth trajectory with aggressive expansion in terms of fleet and routes. Hence we are bringing a new chief executive officer."

Khona, who reverts to Bombay Dyeing, will be succeeded by Giorgio De Roni as chief executive officer. De Roni formerly headed Air One, an Italian private airline with over 60 planes and a turnover of $1 billion.

De Roni said he is no stranger to aggressive growth. “When I joined Air One, it had just 10 planes. When I left, it had 64 planes. So I am ready to lead an aggressive growth path."

Asked about frequent changes in the top management of GoAir, De Roni said promoters would be happy with leadership that delivers results.

“GoAir will not be targeting market share but profitable growth," he said.

The carrier has been doing well because of the revival in the industry, said Nawal Taneja, professor emeritus, department of aviation, Ohio State University. “Most of the airlines are doing well in the light of strong demand. The key question relates to the strength of the GoAir business model in the medium to long term," he said. “In the case of GoAir, the question is not that their business model is weak but rather that it is just a standard model of low cost airlines—serving, for example, a couple of hubs, a few focus cities, one type of aircraft."

“Small differences, such as serving snacks or basic food for a price, is hardly a key differentiating factor. Besides, the business model being a basic standard one, the problem the airline most likely will run into is that there are limited markets where this airplane can be viable," he said.

“There are markets that are too large for this airplane and others too small for this airplane," said Taneja, referring to full-service carriers and GoAir having just one aircraft type.

GoAir should develop the knowhow to manage different aircraft types, he said.

De Roni said the airline has no immediate plans to buy smaller planes to connect tier II and III cities.

Another airline consultant, requesting anonymity, pointed out that GoAir hasn’t explained how it’s going to fund the acquisition and its long-term plans in terms of network expansion.

“It will continue to be small for the next two to three years. And, it has no plans to enter the international market, then why would they need so many planes? It may help in creating better valuation, but weaken the business model. Moreover, the difference between (ticket prices) of low-fare and full-service carriers is shrinking. It’s tough time ahead for GoAir," he said.

Wadia rejected this argument.

“The question of being small was addressed with this aircraft acquisition," he said. “We are not running a sprint, we are here for marathon. Our group has a history of over 250 years."

He also pointed to a more favourable environment for the industry. Better airport infrastructure had made a difference, for instance.

“Earlier, a plane used to take 2.35 hours to complete the Mumbai-Delhi route because of congestion, burning extra fuel. Now, there is an 18% improvement in the same. This is a huge saving," he said.

GoAir is largely focused on metro routes such as Delhi-Mumbai and Delhi-Bangalore. It has also sought to boost efficiency, much in the manner of rival IndiGo, which is reputed for this.

GoAir is focusing on the smallest of issues to improve customer satisfaction and operational efficiency.

“We are focusing on clean aircraft, the cleanest bathroom and smiling crew (members). Cost-reductions measures are ongoing. We are also trying to improve the turnaround time of flights," Wadia said.

GoAir planes are turning around in 16 minutes against the industry standard of 30 minutes, he said. The carrier also plans to introduce more red-eye flights starting early in the morning.

“We will be targeting passengers" who otherwise travel by train on 10-15 hour journeys, he said. “Our idea is to target bus and train travellers by offering lower fares." Wadia also said the airline has a modular or flexible fleet plan under which it will lease four to six planes to meet short-term seasonal demand.